ECB preview – What to expect of EUR/USD?

European Central Bank (ECB) rate and Draghi’s press conference is a main event today for the currency markets and could overshadow US initial jobless claims, unless the number is remarkably strong or weak.

Action in EUR/USD

Rising Fed rate hike bets in May saw EUR/USD pair fall from the high of 1.1616 to 1.11 levels. When viewed on the weekly chart, we can clearly see a rising channel formation, with the pair rebounding from the channel support this week.

The spot currently trades around 1.1190. Since May 20th, the area around 1.1236 (38.2% of 1.0463-1.1714) has acted as a strong support. Even today, the bullish move ran out of steam at 1.1220. When viewed on the hourly chart, we can see that a repeated failure to take out 1.1236 could increase the odds of the pair forming inverse head and shoulder formation.

There is a unanimous opinion in the market that the bank would keep key policy tool unchanged and focus on implementation of TLTRO-II and corporate sector purchase program (CSPP). Draghi could be questioned on his readiness to do more, CPI’s tight correlation with oil , Greek waiver and QE and more importantly Brexit.

Note, the market is positioning for a July Fed rate hike and a possible sell-off in GBP ahead of Brexit could lead to strength in EUR (via rally in EUR/GBP cross). This may be at the back of Draghi’s mind and thus he could tilt slightly on the dovish side.

On the other hand, Yen is strengthening fast and there is little sign the BOJ could intervene/or to put it more bluntly, there is little sign BOJ’s stimulus would work now. This means Draghi has less to worry about imported deflation. Rather drop in EUR/JPY means Eurozone would be importing inflation .

Bank could also revise inflation forecasts higher, but that appears to have been priced-in – given the recovery from 1.11 …despite bearish break below major rising trend line support.

Technical outlook

Pair needs a daily closing above 1.1236 (38.2% of 1.0463-1.1714), which has been a strong resistance since May 20. Acceptance above the same would add credence to the rebound from rising channel support seen on weekly chart and signal a temporary bottom at 1.10 is in place. Thus, resistance at 1.13-1.1342 stand exposed in this case.

On the other hand, Draghi’s dovish talk could send the pair back to intraday support zone around 1.1150 levels, marking another failure near critical resistance at 1.1236. However, bears now need a day end closing below 1.11, which would signal continuation of retreat from the high of 1.1616. In this case, psychological figure of 1.10 could be put to test.